Reg. § 1.672(f)-5 Special rules.
(a) Transfers by certain beneficiaries to foreign grantor
(1) In general If, but for section , a foreign person would be treated as the owner of any portion of a trust, any United States beneficiary of the trust is treated as the grantor of a portion of the trust to the extent the United States beneficiary directly or indirectly made transfers of property to such foreign person (without regard to whether the United States beneficiary was a United States beneficiary at the time of any transfer) in excess of transfers to the United States beneficiary from the foreign person. The rule of this does not apply to the extent the United States beneficiary can demonstrate to the satisfaction of the Commissioner that the transfer by the United States beneficiary to the foreign person was wholly unrelated to any transaction involving the trust. For purposes of this , the term property includes cash, and a transfer of property does not include a transfer that is not a gratuitous transfer (within the meaning of ). In addition, a gift is not taken into account to the extent such gift would not be characterized as a taxable gift under section . For a definition of United States beneficiary, see section .
(2) Examples The following examples illustrate the rules of this section:
Example 1. A, a nonresident alien, contributes property to FC, a foreign corporation that is wholly owned by A. FC creates a foreign trust, FT, for the benefit of A and A's children. FT is revocable by FC without the approval or consent of any other person. FC funds FT with the property received from A. A and A's family move to the United States. Under of this section, A is treated as a grantor of FT. (A may also be treated as an owner of FT under section .)
Example 2. B, a United States citizen, makes a gratuitous transfer of $1 million to B's uncle, C, a nonresident alien. C creates a foreign trust, FT, for the benefit of B and B's children. FT is revocable by C without the approval or consent of any other person. C funds FT with the property received from B. Under of this section, B is treated as a grantor of FT. (B also would be treated as an owner of FT as a result of section .)
(b) Entity characterization Entities generally are characterized under United States tax principles for purposes of through . See through . However, solely for purposes of , a transferor that is a wholly owned business entity is treated as a corporation, separate from its single owner.
(c) Effective date The rules in of this section are applicable to transfers to trusts on or after August 10, 1999. The rules in of this section are applicable August 10, 1999.
[T.D. 8831, 64 FR 43280, Aug. 10, 1999, as amended by T.D. 8890, 65 FR 41334, July 5, 2000]